oversight

Commercial Space Transportation: Industry Trends, Government Challenges, and International Competitiveness Issues

Published by the Government Accountability Office on 2012-06-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States Government Accountability Office

GAO                          Testimony
                             Before the Subcommittee on Science and
                             Space, Committee on Commerce, Science,
                             and Transportation, U.S. Senate

                             COMMERCIAL SPACE
For Release on Delivery
Expected at 10:00 a.m. EDT
Wednesday, June 20, 2012

                             TRANSPORTATION
                             Industry Trends,
                             Government Challenges,
                             and International
                             Competitiveness Issues
                             Statement of Gerald L. Dillingham, Ph.D., Director
                             Physical Infrastructure Issues




GAO-12-836T
                                             June 20, 2012

                                             COMMERCIAL SPACE TRANSPORTATION
                                             Industry Trends, Government Challenges, and
                                             International Competitiveness Issues
Highlights of GAO-12-836T, a testimony
before the Subcommittee on Science and
Space, Committee on Commerce, Science,
and Transportation, U.S. Senate



                                             What GAO Found
Why GAO Did This Study
                                             Since a peak of 22 U.S. commercial space launches in fiscal year 1998, the
                                             annual number of launches generally ranged from 4 to 9 launches. The number
The commercial space launch industry         of commercial space launches is expected to increase in the next 8 years as the
is changing as NASA plans to begin           National Aeronautics and Space Administration (NASA) plans to procure 51
procuring commercial cargo                   launches from commercial cargo companies to resupply the International Space
transportation services to the               Station. FAA also expects space tourism to begin in the next several years,
International Space Station later this       although no companies have applied for a FAA launch license and companies
year and companies are developing            developing these services have experienced delays in the past. FAA faces
vehicles that could carry passengers         several challenges overseeing the commercial space launch industry. For
for space tourism flights. FAA is            example, FAA expects its licensing and oversight responsibilities to expand in
responsible for overseeing the safety
                                             anticipation of an increased private sector role, suggesting that FAA and
of commercial space launches and
                                             Congress must remain vigilant so that potential conflicts in FAA’s safety oversight
promoting the industry. A catastrophic
commercial space launch accident             and industry promotion roles do not occur. Also, as the commercial space launch
could result in injuries or property         industry grows and FAA continues to implement NextGen—FAA’s effort to
damage to the public, or “third parties.”    develop a more automated, aircraft-centered, satellite-based air traffic
In anticipation of such an event, launch     management system—the agency will have to manage a mix of earth-based
companies are required to purchase           aircraft and space vehicles. FAA has begun to consider integrating spaceflight
launch insurance, per calculations           operations into NextGen. In past work, GAO recommended that FAA take
done by FAA and, under the                   several actions to improve its oversight of commercial space launches, including
Commercial Space Launch Act, the             monitoring indicators of space tourism safety. FAA has taken some steps to
federal government is potentially liable     address the recommendations.
for claims above that amount of
purchased insurance. Unless                  Several factors have implications for federal indemnification policy. For example,
reauthorized, the indemnification            under the current policy, the potential increase in the number of commercial
provision expires this year.                 space launches increases the probability of a catastrophic accident and the
                                             possibility of a cost to the federal government. Also, GAO’s preliminary work has
This testimony addresses (1) trends          raised questions about the soundness of the method currently used by FAA to
and forecasts in the commercial space        calculate the amount of insurance that launch companies must purchase: FAA
launch industry and challenges FAA           has not updated crucial components, such as the cost of a casualty, and its
faces in overseeing and promoting the        method is outdated, according to insurance industry officials and risk modeling
industry, (2) preliminary information on
                                             experts. If the current indemnification policy is eliminated, the actual effects on
issues concerning federal
                                             the global competitiveness of the U.S. commercial space launch industry are
indemnification for third party losses,
and (3) challenges to global                 unknown, in part, because it is not known whether launch customers might
competitiveness for the U.S.                 choose foreign launch companies over U.S. companies. However, launch
commercial space launch industry.            companies said that the lack of government indemnification would decrease their
This statement is based on a past            global competitiveness by increasing launch costs.
GAO report and testimonies on                The competitiveness of U.S. commercial space launch companies is affected by
commercial space launches, updated           higher launch prices than those charged by companies in other countries and
with information GAO gathered from
                                             U.S. export controls, which affect U.S. companies’ ability to sell services abroad.
FAA and NASA on industry trends and
                                             The U.S. government has responded to foreign competition by providing the U.S.
recent FAA and NASA actions, and on-
going work on federal indemnification.
                                             launch industry research and development funds, use of federal launch facilities,
GAO is making no recommendations in          and indemnification for a portion of third-party claims.
this statement.


View GAO-12-836T. For more information,
contact Gerald L. Dillingham at (202) 512-
2834 or dillinghamg@gao.gov.

                                                                                     United States Government Accountability Office
Chairman Nelson, Ranking Member Boozman, and Members of the
Subcommittee:

Thank you for the opportunity to testify today on the commercial space
industry. Historically, commercial space launches took place primarily at
federal launch sites and carried payloads (generally satellites) into orbit
using unmanned vehicles that were only used once. The Federal Aviation
Administration (FAA) is responsible for overseeing the safety of these
launches and promoting the industry. Over the last several years the
industry has begun to change. For instance, several companies are in the
process of developing and testing manned, reusable launch vehicles for
commercial space tourism. In addition, since the Space Shuttle fleet was
retired in 2011, the National Aeronautics and Space Administration
(NASA) plans to begin procuring commercial cargo transportation
services to the International Space Station (ISS) later in 2012. With the
successful mission of SpaceX’s Dragon last month, the capability to do so
has been demonstrated. NASA also intends to procure commercial
manned launches to carry its astronauts to the ISS beginning in 2017. 1
Private companies and states are developing commercial spaceports—
sites used for commercial (nongovernment) spacecraft launches to
support the expected growth in commercial space launches. To foster a
competitive environment for the U.S. space launch industry, the federal
government provides, under the Commercial Space Launch Act
Amendments of 1988 (CSLAA), 2 among other things, potential


1
 Since NASA retired its Space Shuttle program in July 2011, it lacks a domestic capability
to send crew and cargo to the ISS. To maintain the ISS through 2020, as required by the
NASA Authorization Act of 2010, NASA is relying on international partners and
commercial vehicles to transport cargo. Pub. L. No. 111-267, §501 All commercial cargo
missions for NASA thus far have been demonstration missions conducted under Space
Act agreements, which involve NASA providing significant funds to private industry
partners to stimulate the development of large-scale commercial space transportation
capabilities. Pub. L. 85-568, 72 Stat. In order to transport crew, NASA is currently
purchasing seats on the Russian Soyuz vehicle. However, NASA has awarded a number
of Space Act agreements to domestic private sector companies to stimulate development
and demonstration of commercial human spaceflight capability, with an eventual goal of
procuring crew transportation services in 2017. For more information on utilizing the ISS,
see GAO, NASA: Significant Challenges Remain for Access, Use, and Sustainment of the
International Space Station, GAO-12-587T (Washington, D.C.: Mar. 28, 2012). For more
information on Space Act agreements, see GAO, Key Controls NASA Employs to Guide
Use and Management of Funded Space Act Agreements Are Generally Sufficient, but
Some Could Be Strengthened and Clarified, GAO-12-230R (Washington, D.C.: Nov. 17,
2011).
2
Pub. L. No. 100-657, 102 Stat. 3903 (1988).




Page 1                                                                       GAO-12-836T
indemnification for a portion of third party liability claims that could arise
from a catastrophic launch-related incident that results in injury or
damage to uninvolved people or property. 3, 4 This legislation expires at the
end of 2012, and Congress will need to determine whether to end, reform,
or continue current commercial space launch indemnification.

My testimony today focuses on (1) trends and forecasts in the U.S.
commercial space launch industry, (2) challenges FAA faces in
overseeing and promoting the industry, (3) preliminary information on
factors for Congress to consider as it determines the future of commercial
space launch indemnification, and (4) challenges to U.S. global
competitiveness as the commercial space industry grows and matures.
This statement is based on our prior testimonies and report on
commercial space issues and has been updated with information we
gathered from FAA and NASA on industry trends and recent FAA and
NASA activities. 5 It is also based on on-going work we are conducting for
this committee and the U.S. House of Representatives’ Committee on
Science and Technology. Additional information on our scope and
methodology is provided in each issued product. We conducted the work
on which this is based in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the
audit to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives. We
believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.




3
51 USC § 50915.
4
 The federal government, subject to appropriations, provides indemnification for losses
that exceed the maximum probable loss up to a limit of $1.5 billion adjusted for post-1988
inflation; in 2012, this amount was approximately $2.7 billion. For each launch, FAA
determines the maximum probable loss, which is the amount of third party losses against
which a launch company must protect by buying third party liability insurance.
5
 See GAO, Commercial Space Launch Act: Preliminary Information on Issues to Consider
for Reauthorization, GAO-12-767T (Washington, D.C.: June 6, 2012); Commercial Space
Transportation: Industry Trends and Key Issues Affecting Federal Oversight and
International Competitiveness, GAO-11-629T (Washington, D.C.: May 5, 2011);
Commercial Space Transportation: Development of the Commercial Space Launch
Industry Presents Safety Oversight Challenges for FAA and Raises Issues Affecting
Federal Roles, GAO-10-286T (Washington, D.C.: Dec. 2, 2009); and Commercial Space
Launches: FAA Needs Continued Planning and Monitoring to Oversee the Safety of the
Emerging Space Tourism Industry, GAO-07-16 (Washington, D.C.: Oct. 20, 2006).




Page 2                                                                        GAO-12-836T
             In 1984, the Commercial Space Launch Act required the Secretary of
Background   Transportation to “encourage, facilitate, and promote commercial space
             launches by the private sector.” 6 Under the Act, FAA was charged with
             regulating the U.S. commercial space launch industry, which it does
             through licensing, compliance monitoring, and safety inspection activities.
             FAA licenses all commercial launches and reentries that take place in the
             United States and overseas by U.S. citizens or companies to ensure the
             safety of the public and property, to ensure compliance with international
             obligations of the United States, and to protect the national security and
             foreign policy interests of the United States. 7 FAA is also responsible for
             licensing the operation of all U.S. spaceports from which commercial
             launches may occur. In addition to its safety oversight and regulatory
             responsibilities, FAA is tasked with facilitating the strengthening and
             expansion of the U.S. space launch infrastructure. In 2004, the
             Commercial Space Launch Amendments Act of 2004 8 gave FAA the
             specific responsibility of overseeing the safety of space tourism. However,
             FAA is prohibited from regulating crew and passenger safety before
             October 2015, except in response to high risk incidents, serious injuries
             or fatalities, or an event that poses a high risk of causing a serious or fatal
             injury.

             Other federal agencies also support the commercial space launch
             industry. NASA supports the industry by providing infrastructure and
             operations support and encouraging private sector investment in its
             launches and other activities. The Department of Defense (DOD), through
             the Air Force, provides infrastructure, operations support, guidance, and
             safety oversight for government and commercial launches at its launch
             sites. The Department of Commerce (Commerce) is also responsible for
             promoting the commercial space industry.

             In addition, similar to other countries such as China, France, and Russia,
             the U.S. government provides indemnification for a portion of claims by



             6
              51 U.S.C. 50903.
             7
              FAA issues four types of licenses: a launch license (for expendable launch vehicles), a
             reusable launch vehicle mission license, a reentry license, and a launch or reentry site
             operator license. The first three types of licenses are issued to the operator of a launch
             vehicle, and the fourth is issued to the operator of a spaceport. FAA also issues
             experimental permits for test flights of reusable launch vehicles.
             8
                 Pub. L. No 108-492.




             Page 3                                                                          GAO-12-836T
third parties for injury, damage, or loss that result from FAA-licensed
commercial launch-related incidents, provided Congress appropriates
funds for this purpose. 9, 10 Prior to issuing a launch or reentry license, FAA
determines the amount of third party losses against which a launch
company must protect by buying third party liability insurance. FAA
determines this by calculating the maximum probable loss, which is an
estimate of the maximum third party losses likely to occur from a
commercial space launch. 11 The federal government, subject to
appropriations, provides indemnification for losses that exceed the
maximum probable loss up to a limit of about $2.7 billion. 12 Parties
involved in launches—for example, passengers and crew—are not
considered third parties, and thus damages to them would not be covered
under the indemnification program. 13 The commitments of the United
States or other countries to pay third party claims have never been
tested. Globally, there has never been a third party claim for damages
from a commercial space launch failure that reached the level of
government indemnification.




9
 51 USC 50914(a)(1)(A).
10
  China, France, and Russia provide more indemnification coverage than the United
States. These countries each have an indemnification regime in which the government
states that it will assume a greater share of the risk compared to that of the United States
because each country places no limit on the amount of government indemnification.
11
  More specifically, the maximum probable loss is based on estimates of losses from
events having greater than a 1 in 10 million chance of occurring.
12
  The $2.7 billion limit on the federal government’s liability is for 2012; this amount is
adjusted for inflation each year.
13
  A crew includes any employee who performs activities directly relating to the launch,
reentry, or other operation relating to the vehicle that carriers human beings. 51 U.S.C §
50902(2). A passenger—also called a spaceflight participant—is an individual who is not
crew, carried aboard a launch vehicle or reentry vehicle. 51 U.S.C § 50902(17).




Page 4                                                                            GAO-12-836T
The Number of FAA-
Licensed Space
Launches Peaked in
1998, but an Increase
Is Anticipated

Launch Trends           Since 1989, FAA has licensed 207 commercial space launches. Since a
                        peak of 22 launches in fiscal year 1998, the annual number of launches
                        generally ranged from 4 to 8 launches. (See fig. 1.) Space launches by
                        private sector companies were relatively high in the late-1990s as U.S.
                        commercial launch companies responded to the increase in global
                        demand for commercial satellite launch services. Since then, the demand
                        for commercial launches has generally declined, except for slight
                        increases in fiscal years 2004 and 2008. The increase in fiscal year 2004
                        was due in part to the inclusion of 4 demonstration flights by
                        SpaceShipOne and the increase in fiscal year 2008 was due, in part, to
                        the return to service of one of the most common launch vehicles following
                        a failure in the previous year. 14 Since fiscal year 2009, FAA has licensed
                        13 commercial space launches, including the launch of the Falcon 9
                        rocket that carried the Dragon capsule that docked with the International
                        Space Station last month.




                        14
                          SpaceShipOne, which resembles an airplane, was launched from an airplane into
                        space, where it traveled nearly 70 miles above the earth, and returned to the original
                        launch site.




                        Page 5                                                                         GAO-12-836T
Figure 1: FAA-Licensed Launches, Fiscal Year 1997 Through June 1, 2012




Note: These numbers include launches by Sea Launch—a multinational consortium that is licensed
by FAA because one of its principals is a U.S. company. The numbers also include 5 launches by
SpaceShipOne—4 in fiscal year 2004 and 1 in fiscal year 2005—which were not FAA-licensed as
they were demonstration flights. All launches were orbital, except those of SpaceShipOne, which
were suborbital.


Despite the low number of licensed launches in recent years, according to
FAA, research and development activity in commercial spaceflight
continues and the tests associated with this activity are not captured in
launch numbers. According to industry experts that we spoke with, since
2006 the commercial space launch industry has experienced a steady
buildup of research and development efforts, including ground tests and
low-altitude flight tests of reusable rocket-powered vehicles that are
capable of numerous takeoffs and landings. (See fig. 2 for examples of
commercial spacecraft being developed.) These activities do not require
licensing. In 2006, FAA began issuing experimental permits to companies
seeking to conduct test launches of reusable space launch vehicles that
could be used for manned commercial flights.




Page 6                                                                             GAO-12-836T
Figure 2: Examples of Commercial Spacecraft under Development




The number of commercial space launches is anticipated to increase in
the years ahead as NASA begins procuring commercial cargo
transportation services to the ISS and private industry continues
developing vehicles for space tourism flights. As previously noted,
SpaceX recently completed the first commercial mission to deliver cargo
to the ISS and bring back scientific samples and other supplies. (See fig.
3.) As a result of this success, SpaceX will begin to fly its 12 missions
under NASA’s Commercial Resupply Services contract for delivery of
cargo to the ISS. Orbital Sciences Corporation has also been awarded a
contract for cargo resupply missions to the ISS through 2016, but has yet
to conduct any demonstration missions. Together, the companies are
scheduled to complete about 39 percent of NASA’s planned launches to
the ISS through 2020. (See table 1.)




Page 7                                                          GAO-12-836T
                                        Figure 3: SpaceX Dragon Docked with the ISS, May 2012




Table 1: NASA’s Planned Launches to Resupply the ISS from 2012 to 2020 (as of March 2012)

Vehicle                                              2012       2013         2014   2015   2016   2017   2018    2019    2020       Total
European Automated Transfer Vehicle (ATV)a                1          1          1      0      0      0       0      0           0      3
Japanese H-II Transfer Vehicle (HTV)a                     1          1          1      1      1      1       1      1           1      9
SpaceX                                                    2          2          2      3      3      0       0      0           0     12
Orbital                                                   1          2          1      2      2      0       0      0           0      8
                             b
Follow-on commercial resupply                             0          0          0      0      0      5       5      5           4     19
Total                                                     5          6          5      6      6      6       6      6           5     51
                                        Source: GAO analysis of NASA data.
                                        a
                                         The ATV and HTV are unmanned vehicles that have flown to the ISS.
                                        b
                                         NASA does not have contracts with commercial providers or negotiated agreements with
                                        international partners for flights from 2017 through 2020.


                                        FAA expects space tourism activity to begin in the coming years and,
                                        while companies are developing vehicles to provide space tourism
                                        services, the industry has experienced delays in its development in the
                                        past. The prospect for commercial space tourism materialized in 2004



                                        Page 8                                                                             GAO-12-836T
                        with the successful flights of SpaceShipOne, which have been the only
                        manned commercial flights to date. Virgin Galactic, which formed a joint
                        venture with Scaled Composites to develop SpaceShipTwo, is the
                        farthest along among the space tourism companies and has taken
                        deposits from more than 500 customers to reserve a place on a future
                        flight. However, Virgin Galactic has not yet applied to FAA for a launch
                        license and its planned schedule for flights has experienced delays in the
                        past. The planned and anticipated increase in launches, from NASA and
                        potentially from space tourism, has implications for FAA’s oversight
                        responsibilities and the federal government’s potential liability in providing
                        third party indemnification, as we discuss later in this statement.


Commercial Spaceports   In the United States, private companies and state governments have
                        been developing additional spaceports to accommodate the anticipated
                        space tourism flights and expand the nation’s launch capacity. There are
                        currently eight nonfederal FAA-licensed spaceports as well as two private
                        facilities each with one resident launch provider—Blue Origin and Sea
                        Launch—which are termed sole-site operators. (See fig. 4.) In addition,
                        state governments and local communities have proposed establishing
                        commercial spaceports in six additional locations.




                        Page 9                                                             GAO-12-836T
Figure 4: Licensed Spaceports as of February 2012




                                        a
                                        Private facility with a sole site operator.


                                        Both states and FAA have provided support for the development of
                                        commercial spaceports. States have provided economic incentives to
                                        developers to build spaceports to attract space tourism that could in turn
                                        provide economic benefits to localities. For example, New Mexico
                                        provided approximately $209 million to construct Spaceport America 15
                                        and the Florida Space Authority, a state agency, invested over $500
                                        million in new space industry infrastructure development at Cecil Field
                                        Spaceport, including upgrades to the launch pad, a new space operations


                                        15
                                          Approximately $133 million came from state appropriations. The remainder came from
                                        tax bonds collected from Dona Ana and Sierra counties in New Mexico.




                                        Page 10                                                                   GAO-12-836T
                            support complex, and a reusable launch vehicle support complex. In
                            addition, Virginia recently enacted legislation to provide $9.5 million
                            annually to support the capital needs, maintenance, and operating costs
                            of facilities owned and operated by the Virginia Commercial Space Flight
                            Authority—including the Mid-Atlantic Regional Spaceport—and has
                            provided state tax exemptions for companies launching payloads from the
                            spaceport or doing space-related business activities in Virginia. However,
                            according to a senior FAA official, continued state support for spaceports
                            in the current fiscal environment has been mixed. The official added that
                            although there are eight licensed spaceports, there has not been launch
                            activity at all of them. Until there is a launch provider that begins
                            operations and brings revenue to a spaceport, support is difficult to justify.
                            In addition, federal support for spaceports has been affected by the fiscal
                            environment. In 2010, FAA distributed a total of $500,000 in appropriated
                            funds to four spaceports in the first Commercial Space Transportation
                            Grants. Since then it has drawn from its operations budget to sustain the
                            program.


                            As it oversees a changing commercial space launch industry, FAA faces
FAA Faces Several           various challenges. These include addressing a potential growth in its
Significant Challenges      licensing and oversight workload, ensuring that its safety regulations are
                            equally suitable for commercial spaceports and federal launch sites,
as It Oversees a            avoiding potential conflicts between its dual roles of safety oversight and
Changing Commercial         industry promotion, and adequately accommodating space flight in its air
                            traffic management system.
Space Launch
Industry

Potential Industry Growth   FAA expects its licensing and oversight responsibilities of commercial
and FAA’s Workload          space launches to expand in the next few years with the licensing of
                            NASA-contracted launches as NASA begins this year to use new
                            commercially-developed and operated vehicles to deliver cargo and later
                            crew to the ISS. NASA plans to contract with commercial launch
                            companies for these services. FAA and NASA announced on June 18,
                            2012, that FAA will license NASA-contracted vehicles and services. FAA
                            expects the number of commercial launches to increase as private
                            companies work toward providing flight services to paying
                            passengers. FAA requires either a launch and a reentry license or a
                            permit. As mentioned earlier in this statement, manned commercial
                            launches have not occurred since 2004, and Virgin Galactic is the
                            company closest to developing a vehicle for space tourism, but it has not


                            Page 11                                                            GAO-12-836T
                                       filed for FAA licenses. Therefore, it is not clear when FAA’s workload
                                       would be affected by space tourism.

                                       As of November 2011, FAA’s workload included 15 active launch
                                       licenses, 8 active launch site operator licenses, and 2 active experimental
                                       permits. FAA evaluates applications for launch licenses by reviewing the
                                       safety, environmental, payload, and policy implications of a launch and
                                       determining the launch company’s insurance liability or financial
                                       responsibility. FAA’s licensing process is described in fig. 4.

Figure 4: FAA’s Launch Licensing Process




                                       According to FAA officials, FAA’s Office of Commercial Space
                                       Transportation has 72 full-time staff, as of June 2012, to oversee
                                       commercial space launches. FAA’s fiscal year 2013 budget request
                                       includes resources to hire an additional 10 safety experts to evaluate
                                       license applications, conduct safety inspections, and provide oversight in
                                       its field offices.

                                       FAA expects its workload to increase over the next several years as it
                                       begins to develop safety regulations for commercial human spaceflight.
                                       Although a moratorium on FAA regulations for passenger safety has been
                                       extended to October 2015, we have previously recommended that FAA



                                       Page 12                                                         GAO-12-836T
                             identify and continually monitor indicators of space tourism industry
                             safety. 16 Although FAA was not able to address our recommendation
                             directly because there have been no launches with passengers, it is
                             taking other steps—e.g., reviewing NASA’s certification of space launch
                             vehicles as worthy of transporting humans (i.e., human rating) and its own
                             aircraft certification processes—that will help FAA be prepared to regulate
                             passenger safety. We believe that these are reasonable preliminary steps
                             to regulate crew and passenger safety.


Suitability of Safety        As noted earlier, spaceports are being developed to accommodate
Regulations for Spaceports   anticipated commercial space tourism flights. However, FAA faces
                             challenges related to regulating commercial spaceports. Specifically, FAA
                             must ensure that its regulations on licensing and safety requirements for
                             launches and launch sites, which are based on safety requirements for
                             expendable launch vehicles (i.e., vehicles that are only used once and do
                             not return to Earth) at federal launch sites, will also be suitable for
                             operations at commercial spaceports. We have reported that the safety
                             regulations for expendable launch vehicles may not be suitable for space
                             tourism flights because of differences in vehicle types and launch
                             operations, according to experts we spoke with. 17 Similarly, spaceport
                             operators and experts we spoke with raised concerns about the suitability
                             of FAA safety regulations for commercial spaceports. Experts told us that
                             safety regulations should be customized for each spaceport to address
                             the different safety issues raised by various types of operations, such as
                             different orbital trajectories and differences in the way that vehicles
                             launch and return to earth, whether vertically or horizontally. To address
                             these concerns, we reported that it will be important to measure and track
                             safety information and use it to determine if the regulations should be
                             revised. We did not make recommendations to FAA concerning these
                             issues because the Commercial Space Launch Amendments Act of 2004
                             required the Department of Transportation (DOT) to commission an
                             independent report to analyze, among other things, whether expendable
                             and reusable vehicles should be regulated differently from each other,


                             16
                               GAO-07-16.
                             17
                               We recommended that FAA develop a formal process for consultations between its
                             Office of Commercial Space Transportation and Office of Aviation Safety about licensing
                             reusable launch vehicles. In response, the two offices developed an agreement defining
                             their roles and responsibilities regarding the review of hybrid aircraft/launch vehicles. See
                             GAO-07-16.




                             Page 13                                                                          GAO-12-836T
                     and whether either of the vehicles should be regulated differently if
                     carrying passengers. The report, issued in November 2008, concluded
                     that the launch of expendable vehicles, when used to lift reusable rockets
                     carrying crew and passengers, as well as launch and reentry of reusable
                     launch vehicles with crew and passengers should be regulated differently
                     from the launch of expendable vehicles without humans aboard. The
                     report also noted that the development of a data system to monitor the
                     development and actual performance of commercial launch systems and
                     to better identify different launch risk factors and criteria would greatly
                     assist the regulatory process. 18


Dual Oversight and   In 2006, we reported that FAA faced the potential challenge of overseeing
Promotion Roles      the safety of commercial space launches while promoting the industry. 19
                     While we found no evidence that FAA’s promotional activities—such as
                     sponsoring an annual industry conference and publishing studies of
                     industry trends—conflicted with its safety regulatory role, we noted that
                     potential conflicts may arise as the space tourism sector develops. We
                     reported that as the commercial space launch industry evolves, it may be
                     necessary to separate FAA’s regulatory and promotional activities.
                     Recognizing the potential conflict, Congress required the 2008 DOT-
                     commissioned report to discuss whether the federal government should
                     separate the promotion of commercial human spaceflight from the
                     regulation of such activity. The 2008 commissioned report concluded
                     there was no compelling reason to remove promotional responsibilities
                     from FAA in the near term (through 2012) noting that FAA allocated
                     approximately 16 percent of the commercial space budget in fiscal year
                     2008, which was significantly less than what was allocated for activities
                     directly related to safety. FAA’s requested allocation for promotional
                     activities is 12 percent of the commercial space budget request for fiscal
                     year 2013, according to an FAA official. The report further stated that
                     periodic review of the issue was warranted as the commercial space
                     launch industry changed. We continue to concur with the commissioned
                     report’s assessment and see no need for Congress to step in at this time
                     to require a separation of regulatory and promotional activities since
                     resource allocations for promotion remains at a relatively low level, and


                     18
                      The Aerospace Corporation, et al., Analysis of Human Space Flight Safety, Report to
                     Congress (El Segundo, CA: Nov. 11, 2008).
                     19
                      GAO-07-16.




                     Page 14                                                                    GAO-12-836T
                          few commercial space launches are occurring. However, FAA and
                          Congress must continue to remain vigilant that a situation in which FAA
                          jeopardizes the public interest by subordinating it to that of the
                          commercial space launch industry does not occur.


Spaceflight and NextGen   NextGen—FAA’s efforts to transform the current radar-based air traffic
                          management system into a more automated, aircraft-centered, satellite-
                          based system—will need to accommodate spacecraft that are
                          transitioning to and from space through the national airspace system. As
                          the commercial space launch industry grows and spaceflight technology
                          advances, FAA expects that the agency will need tools to manage a mix
                          of diverse aircraft and space vehicles in the national airspace system. In
                          addition, the agency will need to develop new policies, procedures, and
                          standards for integrating spaceflight operations into NextGen. For
                          example, FAA will have to define new upper limits to the national airspace
                          system 20 to include corridors for flights transitioning to space; establish
                          new air traffic procedures for flights of various types of space vehicles,
                          such as aircraft-ferried spacecraft and gliders; develop air traffic
                          standards for separating aircraft and spacecraft in shared airspace; and
                          determine controller workload and crew rest requirements for space
                          operations. FAA has begun to consider such issues and generally
                          includes them in its concept of operations for NextGen.


                          Several factors have implications for federal indemnification policy.
Factors Congress          These include the potential for manned launches, the soundness of FAA’s
Should Weigh              calculation of maximum probable loss, a gap in the indemnification policy,
                          and the potential effects that ending federal indemnification could have on
Concerning                the global competitiveness of the U.S. commercial space launch industry.
Commercial Space
Launch
Indemnification




                          20
                           The national airspace system currently extends to 60,000 feet above mean sea level.




                          Page 15                                                                    GAO-12-836T
Potential Manned   Our ongoing work indicates that the expected increase in manned
Launches           commercial launches raises a number of issues that have implications for
                   the federal government’s indemnification policy for third party liability.
                   First, the number of launches and landings covered by federal
                   indemnification could increase with NASA’s planned manned launches,
                   which will be FAA licensed. NASA expects to procure from private launch
                   companies two manned launches per year to the ISS from 2017 to
                   2020. 21 In addition, the development of a space tourism industry may also
                   increase the number of launches and landings covered by federal
                   indemnification, but the timing of tourism launches and landings is
                   uncertain.

                   According to insurance company officials with whom we spoke, the
                   potential volume of manned launches for NASA and for space tourism
                   could increase the overall amount of insurance coverage needed by
                   launch companies, which could raise insurance costs, including those for
                   third party liability. 22 By increasing the number of launches, the probability
                   of a catastrophic event is also increased, and any accident that occurs
                   could also increase future insurance costs, according to insurance
                   company officials. A catastrophic accident could also result in third party
                   losses over the maximum probable loss, which would invoke federal
                   indemnification, provided Congress appropriates funds for this purpose.

                   Second, because newly developed manned launch vehicles have a
                   limited launch history, they are viewed by the insurance industry as more
                   risky than “legacy” launch vehicles. Insurance company officials told us
                   that a launch vehicle such as United Launch Alliance’s Atlas V, which
                   launches satellites and may be used for future manned missions, is seen
                   as less risky than new launch vehicles, such as SpaceX’s Falcon 9, which
                   could also be used for manned missions. According to insurance
                   company officials with whom we spoke, they expect to charge higher


                   21
                      NASA-contracted launches for its science missions are not currently covered by CSLAA;
                   rather, NASA requires its launch contractors to obtain insurance coverage for third party
                   losses. The amount of the insurance required by NASA is the maximum amount available
                   in the commercial marketplace at reasonable cost, but not to exceed $500 million per
                   launch. The facts and circumstances for claims in excess of this amount would be
                   forwarded by NASA to the Congress for its consideration 51 U.S.C. § 20113 (m) (2).
                   NASA-contracted launches for the Commercial Resupply Services to the ISS will be
                   licensed by FAA under CSLAA, and will be covered by CSLAA indemnification.
                   22
                     Launch providers obtain insurance in addition to that for third party liability, including
                   coverage of assets, such as the launch vehicle.




                   Page 16                                                                            GAO-12-836T
                        insurance premiums for newly developed launch vehicles than legacy
                        launch vehicles given their different risk profiles. Insurance company
                        officials’ opinions varied as to when a launch vehicle is deemed reliable—
                        from 5 to 10 successful launches. They also told us that whether vehicles
                        are manned is secondary to the launch vehicle’s history and that the
                        launch’s trajectory—over water or land—is also considered in determining
                        risk and, consequently, the price and amount of third party liability
                        coverage.

                        Third, having people on board a space vehicle raises issues of informed
                        consent and cross waivers, which could affect third party liability and the
                        potential cost to the federal government. CSLAA requires passengers and
                        crew on spaceflights to be informed by the launch company of the risks
                        involved and to sign a reciprocal waiver of claims (also called a cross
                        waiver) with the federal government—meaning that the party agrees not
                        to seek claims against the federal government if an accident occurs.
                        CSLAA also requires cross waivers among all involved parties in a
                        launch. Two key issues dealing with cross waivers include the estates of
                        spaceflight passengers and crew and limits on liability for involved parties.
                        One issue is the estates of spaceflight passengers and crew, which are
                        considered third parties to a launch, are not covered by informed consent
                        and cross waiver of claims, according to two insurance companies and
                        one legal expert. Another issue, according to two insurance companies
                        and two legal experts, requiring cross waivers among passengers, crew,
                        the launch company, and other involved parties may not minimize
                        potential third party claims as they would not place limitations on liability.


Maximum Probable Loss   The potential costs to the government under CSLAA—that is, the federal
                        government’s exposure to liability—depends on FAA’s maximum
                        probable loss calculation, which assesses a launch’s risk. If the
                        calculation is understated, then the government’s exposure to liability is
                        higher; conversely, if the calculation is overstated, then launch companies
                        are required to purchase more insurance than intended. Therefore, it is
                        important that FAA use an appropriate process for determining the
                        maximum probable loss. Our preliminary work identified several issues
                        that raise questions about the soundness of FAA’s maximum probable
                        loss methodology:

                        •   FAA uses a figure of $3 million when estimating the cost of a single
                            potential casualty—that includes either injury or death—which FAA
                            officials said has not been updated since they began using it in 1988.
                            Two insurers, as well as representatives of two risk modeling


                        Page 17                                                            GAO-12-836T
    companies that specialize in estimating damages from catastrophic
    events, said that this figure is likely understated. Because this number
    has not been adjusted for inflation or updated in other ways, it may
    not adequately represent the potential current cost of injury or death
    caused by commercial space launch failures.

•   FAA’s methodology for determining potential property damage from a
    commercial space launch starts with the total cost of casualties and
    adds a flat 50 percent to that cost as the estimate of property damage,
    rather than specifically analyzing the number and value of properties
    that could be affected in the event of a launch failure. One insurer and
    two risk modelers said that FAA’s approach is unusual and generally
    not used to estimate potential losses from catastrophic events. For
    example, officials from both modeling companies noted that the more
    common approach is to model the property losses first and derive the
    casualty estimates from the estimated property losses. One modeler
    stated that FAA’s method might significantly understate the number of
    potential casualties, noting that an event that has a less than 1 in 10
    million chance of occurring is likely to involve significantly more
    casualties than predicted under FAA’s approach. Moreover, a 2007
    FAA review conducted with outside consultants said that this
    approach is not recommended because of observed instances where
    casualties were low yet forecasted property losses were very large.

•   More broadly, FAA’s method does not incorporate what is known in
    the insurance industry as “catastrophe modeling.” One modeler told
    us that catastrophe modeling has matured over the last 25 years—as
    a result of better data, more scientific research, and advances in
    computing—and has become standard practice in the insurance and
    reinsurance industries. Catastrophe models consist of two
    components: a computer program that mathematically simulates the
    type of event being insured against and a highly detailed database of
    properties that could potentially be exposed to loss. Tens of
    thousands or more computer simulations are generated to create a
    distribution of potential losses and the simulated probability of
    different levels of loss. In contrast, FAA’s method involves estimating
    a single loss scenario. FAA officials told us that they have considered
    the possibility of using a catastrophe model. However, they expressed
    concern about whether the more sophisticated approach would be
    more accurate, given the great uncertainty about the assumptions—
    such as the probability and size of potential damages—that must be
    made with any model. Also, both experts and FAA officials told us that
    developing a catastrophe modeling capability would entail significant
    costs.


Page 18                                                          GAO-12-836T
                  FAA officials said that they believe the maximum probable loss
                  methodology is reasonable and produces conservative results. The same
                  officials noted that they periodically evaluate their current maximum
                  probable loss methodology, but acknowledged that they have not used
                  outside experts or risk modelers for this purpose. They agreed that such a
                  review could be beneficial, and that involvement of outside experts might
                  be helpful for improving their maximum probable loss methodology. As
                  we finalize our review of CSLAA indemnification policy, we will address
                  any additional federal actions needed in response to our analysis.


Gap in Federal    Officials from the insurance industry and space launch companies, as
Indemnification   well as an expert, characterized the lack of coverage of on-orbit
                  activities—that is, activities not related to launch or reentry, such as
                  relocating a satellite from one orbit to another orbit—as a gap in federal
                  indemnification, but they did not agree on the need to close this gap. FAA
                  licenses commercial launches and reentries, but does not license on-orbit
                  activities. Federal indemnification only applies to FAA-licensed space
                  activities. One expert noted that federal oversight of on-orbit activities
                  may be needed to provide consistency and coordination among agencies
                  that have on-orbit jurisdiction. He pointed out that the Federal
                  Communications Commission and the National Oceanic and Atmospheric
                  Administration have jurisdiction over their satellites and NASA has
                  jurisdiction over the ISS. Thus, according to the expert, there should be
                  one federal agency that coordinates regulatory authority over on-orbit
                  activities. On the other hand, officials from two launch companies told us
                  that they did not believe that on-orbit activities need to be regulated by
                  FAA or that federal indemnification coverage should be provided.

                  According to senior agency officials, FAA may seek statutory authority
                  over on-orbit activities, although not for satellite or spectrum usage. An
                  insurer told us that having FAA in charge from launch to landing would
                  help ensure that there were no gaps in coverage. According to this
                  insurer, this would help bring stability to the insurance market in the event
                  of an accident as involved parties would be clear on which party is liable
                  for which activities. Congress would decide whether FAA’s on-orbit
                  authority would include licensing on-orbit activities. If FAA were granted
                  the authority to license on-orbit activities, this would increase the potential
                  costs to the federal government for third party claims as its exposure to
                  risk would increase.




                  Page 19                                                             GAO-12-836T
Indemnification and U.S.   Our on-going work indicates it is difficult to predict how insurance
Competitiveness            premiums or other costs might change as well as the availability of
                           coverage if indemnification were eliminated. In addition, we do not know
                           whether or to what extent launch customers might choose foreign launch
                           companies over U.S. companies. Furthermore, it is difficult to separate
                           out the effects of withdrawing indemnification on the overall
                           competitiveness of the U.S. commercial space launch industry. Many
                           factors affect the industry’s competitiveness, including other U.S.
                           government support, such as research and development funds,
                           government launch contracts, and use of its launch facilities, in addition to
                           the third party indemnification.

                           Our work to date suggests that while the actual effects on competition of
                           eliminating CSLAA indemnification are unknown, several launch company
                           representatives and customers with whom we spoke said that in the
                           absence of CSLAA indemnification, higher costs and increased risk would
                           directly affect launch companies and indirectly affect their customers and
                           suppliers. The same participants said that two key factors—launch price
                           and launch vehicle reliability—generally determine the competitiveness of
                           launch companies. According to two launch customers, launch prices for
                           similar missions can vary dramatically across countries. For example, two
                           customers said that a similar launch might cost about $40 million to $60
                           million with a Chinese company, about $80 million to $100 million with a
                           French company, and approximately $120 million with a U.S. company.
                           Other considerations also would be involved in selecting a launch
                           company, according to launch customers with whom we spoke. For
                           example, some said that export restrictions for U.S. customers could add
                           to their costs or prevent them from using certain launch companies. One
                           launch customer also said that it considers the costs of transporting the
                           satellite to the launch site as well as other specific aspects of a given
                           launch.

                           U.S. launch company representatives said that the lack of government
                           indemnification would decrease their global competitiveness by
                           increasing launch costs. Those officials said their costs would increase as
                           a result of their likely purchase of greater levels of insurance to protect
                           against third party losses, as the launch companies themselves would be
                           responsible for all potential third party claims, not just those up to the
                           maximum probable loss amount. Some launch companies told us that
                           they would likely pass additional costs on to their customers by increasing
                           launch prices. Two launch customers told us that in turn, they would pass
                           on additional costs to their customers.



                           Page 20                                                           GAO-12-836T
                          Launch company representatives and customers said that ending CSLAA
                          indemnification would also decrease the competitiveness of U.S. launch
                          companies because launch customers would be exposed to more risk
                          than if they used launch companies in countries with government
                          indemnification. For example, representatives from several launch
                          companies and customers said that if some aspect of the launch payload
                          is determined to have contributed to a launch failure, they could be
                          exposed to claims for damages from third parties and therefore might be
                          more likely to use a launch company in a country where the government
                          provides third party indemnification. Some also noted that the increased
                          potential for significant financial loss for third party claims could cause
                          launch companies, customers, or suppliers to decide if it was no longer
                          worthwhile to be involved in the launch business, resulting in lost jobs and
                          industrial capacity. Lastly, one industry participant pointed out that some
                          suppliers, such as those that build propulsion systems, have to maintain
                          significant amounts of manufacturing capacity whether they build one
                          product or many. If there are fewer launches, the cost of maintaining that
                          capacity will be spread among these fewer launches, resulting in a higher
                          price for each launch. To the extent that the federal government is a
                          customer that relies on private launch companies for its space launch
                          needs, it too could face potentially higher launch costs.


Alternatives for          Because launch failures and changing market conditions could change
Addressing Space Launch   the amounts of coverage available in the private market, you have
Risk                      expressed interest in other possible ways of managing catastrophic risk.
                          While we have not conducted specific work to analyze the feasibility of
                          alternative approaches for providing coverage currently available through
                          CSLAA, FAA and others have looked at possible alternatives to CSLAA
                          indemnification and we have examined different methods for addressing
                          the risk of catastrophic losses associated with natural disasters and acts
                          of terrorism. 23 These events, like space launch failures, have a low
                          probability of occurrence but potentially high losses. Some methods


                          23
                            See FAA, Liability and Risk-Sharing Regime for U.S. Commercial Space Transportation:
                          Study and Analysis and Aerospace Corporation, Study of the Liability Risk-Sharing
                          Regime in the United States for Commercial Space Transportation. See also GAO,
                          Catastrophe Insurance Risks: The Role of Risk-Linked Securities and Factors Affecting
                          Their Use, GAO-02-941 (Washington, D.C.: Sept. 24, 2002); Catastrophe Insurance
                          Risks: The Role of Risk-Linked Securities, GAO-03-195T (Washington, D.C.: Oct. 8,
                          2002); and Natural Disasters: Public Policy Options for Changing the Federal Role in
                          Natural Catastrophe Insurance, GAO-08-7 (Washington, D.C.: Nov. 26, 2007).




                          Page 21                                                                   GAO-12-836T
involve the private sector, including going beyond the traditional
insurance industry, in providing coverage, and include the use of
catastrophe bonds or tax incentives to insurers to develop catastrophe
surplus funds. Other methods aid those at risk in setting aside funds to
cover their own and possibly others’ losses, such as through self-
insurance or risk pools. 24 Still other methods, such as those used for flood
and terrorism insurance, involve the government in either providing
subsidized coverage or acting as a backstop to private insurers. 25

Use of any such alternatives could be complex and would require a
systematic consideration of their feasibility and appropriateness for third
party liability insurance for commercial space launches. For example,
according to a broker and a risk expert, a lack of loss experience
complicates possible ways of addressing commercial space launch third
party liability risk, and according to another risk expert, any alternative
approaches for managing this risk would need to consider key factors,
including the

•    number of commercial space launch companies and insurers and
     annual launches among which to spread risk and other associated
     costs;
•    lack of launch and loss experience and its impact on predicting and
     measuring risk, particularly for catastrophic losses; and
•    potential cost to private insurers, launch companies and their
     customers, and the federal government.

As such, alternatives could potentially require a significant amount of time
to implement.




24
  See GAO, Catastrophe Insurance Risks: Status of Efforts to Securitize Natural
Catastrophe and Terrorism Risk, GAO-03-1033 (Washington, D.C.: Sept. 24, 2003). Self-
insurance occurs when an entity assumes the risk for its losses and can involve the
formation of an insurance company solely for that purpose. Risk pooling occurs when two
or more entities agree to set aside funds to help pay for the others’ losses.
25
  See GAO, Flood Insurance: FEMA’s Rate-Setting Process Warrants Attention,
GAO-09-12 (Washington, D.C.: Oct. 31, 2008) and Terrorism Insurance: Status of Efforts
by Policyholders to Obtain Coverage, GAO-08-1057 (Washington, D.C.: Sept. 15, 2008).




Page 22                                                                    GAO-12-836T
                      The competitiveness of the U.S. commercial space launch industry is
Several Factors       affected by high launch prices and export controls, which affect its ability
Hinder the            to sell its services abroad. Based on several measures of global
                      competitiveness, the U.S. commercial space launch industry has
Competitiveness of    generally trailed Russia and France in recent years. For example, in 8 of
the U.S. Commercial   the last 10 years, U.S. commercial space launch companies generated
Space Launch          less revenue that either Russia or France. U.S. companies generated no
                      commercial launch revenue in 2011 because they conducted no
Industry              launches. 26 (See fig. 5.)




                      26
                       The one FAA-licensed launch that occurred in 2011 was by Sea Launch, which is a
                      multinational company, not a U.S. company.




                      Page 23                                                                  GAO-12-836T
Figure 5: Worldwide Commercial Space Launch Revenues, 2002-2011




Note: International revenue data for 2012 is not available.




We previously reported that as the U.S. commercial space launch
industry expands, it will face key competitive issues, including high launch
prices and export controls, that affect its ability to sell its services
abroad. 27 Foreign competitors have historically offered lower launch
prices than U.S. launch providers, as mentioned previously in this
statement. The U.S. government has responded to foreign competition by
providing the commercial launch industry support, including research and
development funds, government launch contracts, use of its launch


27
  GAO-07-16.




Page 24                                                           GAO-12-836T
               facilities, and, as already discussed, indemnification for third-party losses
               that exceed the maximum probable loss. 28

               Industry representatives that we interviewed told us that export licensing
               requirements affect the ability of the U.S. commercial space launch
               industry to sell launch vehicles abroad because they can deliver
               chemical, biological, and nuclear weapons. In previous work, a senior
               Commerce official told us that the U.S. commercial space launch industry
               had asked Congress to consider amending the statute that restricts space
               manufacturing items for export. A change in statute would allow for the
               Department of State (State) and DOD to review individual items for
               export, as they do for other industries.

               Finally, the commercial space launch industry operates without the
               benefit of a national strategy. Numerous agencies—including FAA,
               NASA, State, and Commerce—are responsible for space activities and
               have developed their own strategies. A national space launch strategy
               could identify and fill gaps in federal policy concerning the commercial
               space launch industry, according to senior FAA and Commerce officials.
               According to those officials, the need for an overall U.S. space launch
               policy, which includes commercial space launches, was being discussed
               within DOT and across other departments as part of the administration’s
               review of national space activities, but developing a national policy had
               not yet begun. Guidance on launch acquisitions will, however, be included
               in the updated National Space Transportation Policy, which is currently
               under development and a date for issuance has not been publically
               announced.


               In closing, despite the decrease in FAA-licensed commercial launches
Concluding     since fiscal year 1998, commercial space launch is a dynamic industry
Observations   with newly developing vehicles and missions. As the realization of space
               tourism nears and NASA relies more heavily on commercial providers to
               deliver cargo and crew to the ISS, the number and types of flights may
               increase, which will have implications for FAA oversight and federal
               indemnification support. As we previously recommended, FAA should
               continue to take steps to gather and review launch data that will enable it



               28
                 There have been no commercial space launch accidents that resulted in third-party
               losses that required government indemnification.




               Page 25                                                                     GAO-12-836T
                  to be prepared to regulate human spaceflight when the regulation
                  moratorium expires in 2015. In addition, as the industry changes and
                  grows, continually assessing federal liability indemnification policy to
                  ensure that it protects both launch companies and the federal government
                  will be important. As we complete our analysis of federal indemnification,
                  we will more fully address any additional federal actions needed in
                  response to these developments. Finally, the potential changes to the
                  industry may present the conditions under which a subsequent review of
                  FAA’s dual role in promoting and overseeing commercial space launch
                  safety is warranted.


                  Chairman Nelson, Ranking Member Boozman, and Members of the
                  Subcommittee, this concludes my prepared statement. I would be
                  pleased to answer any questions at this time.


                  For further information on this testimony, please contact Gerald L.
GAO Contact and   Dillingham, Ph.D., at (202) 512-2834 or dillinghamg@gao.gov. In
Staff             addition, contact points for our Offices of Congressional Relations and
                  Public Affairs may be found on the last page of this statement. Individuals
Acknowledgments   making key contributions to this testimony include Alicia Puente Cackley
                  (Director), Teresa Spisak and Patrick Ward (Assistant Directors), Pamela
                  Vines, Jessica Wintfeld, James Geibel, David Hooper, Delwen Jones,
                  Maureen Luna-Long, Shelby Oakley, Susan Offutt, Steve Ruszczyk,
                  Melvin Thomas, and Frank Todisco.




(540245)
                  Page 26                                                         GAO-12-836T
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